Paycheck Protection Program: What the CARES Act Provision Means for Your Business

April 6, 2020

Paycheck Protection Program: What the CARES Act Provision Means for Your Business

As businesses struggle to stay afloat during the COVID-19 crisis, the U.S.  government has enacted several relief efforts aimed at keeping businesses open and employees collecting a paycheck.

One such effort is the Paycheck Protection Program (PPP), a nearly $350 billion program that’s part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.  PPP is a loan program designed to provide incentives for small businesses to keep their workers on the payroll with eight weeks of cash-flow assistance through 100% federally guaranteed loans.  These loans have a maturity rate of two years and an interest rate of 1.0%.

PPP loans are backed by the Small Business Association (SBA) but provided through SBA-approved lenders.  Thanks to numerous intricacies involved in these loans, each case will be different, but the following information highlights the key points.

Is my business eligible?
The short answer is all small businesses are eligible including nonprofits and veterans’ organizations. If you have 500 or fewer employees - or meet the applicable size standard in number of employees established by the SBA - your business should qualify. If you have questions about whether your business qualifies as a small business, use this online tool from the SBA:

For businesses in the accommodation and food services sector (NAICS 72), the 500-employee threshold is determined on a per-location basis.

Relief is also available for sole proprietorships, independent contractors and self-employed individuals if they can provide documentation substantiating income (i.e. schedules from tax returns, Form 1099-MISC and payroll tax filings.)

What’s the maximum loan I can get?
The most you can receive from your SBA-approved lender is your monthly average payroll costs incurred during the 1-year period before the date the loan is made multiplied by 2.5, plus any outstanding principle balance of any Economic Injury Disaster Loan (EIDL) issued after January 1, 2020 and ending on the date covered loans are made available.  The maximum is $10 million.

For seasonal employers, the monthly average cost is calculated differently.  Lenders will use a 12-week period beginning either February 15, 2019 or March 1, 2019 and ending June 30, 2019.

If your business did not exist before June 30, 2019, lenders will look at your costs from January 1, 2020 through February 29, 2020.

What’s included in “payroll costs”?

Payroll costs include any compensation with respect to employees, including:

  • Salary, wage commission or similar compensation
  • Cash tips or equivalent
  • Vacation, parental, family medical or sick leave
  • Allowance for dismissal or separation
  • Group health care benefits, including insurance premiums
  • Retirement benefits
  • State or local tax assessed on the compensation
  • Any compensation to or income of a sole proprietor or independent contractor that is wage, commission, income, or net earnings from self-employment that is not more than $100,000 per year

Costs that are not included in payroll costs include:

  • Annual salary for an individual employee over $100,000
  • Taxes under chapters 21, 22 or 24 of the Internal Revenue Code of 1986 for the period between February 15, 2020 and June 30, 2020
  • Compensation for an employee whose principal residence is outside of the United States
  • Qualified sick leave for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (FFCRA)

What can I use the money for?
PPP loans are available specifically to retain workers and make mortgage, lease and utility payments.  If you use the funds for other purposes, you will not be eligible for loan forgiveness.  Funds can be used for:

  • Payroll and commission
  • Group health care benefits including paid sick, family and medical leave and insurance premiums
  • Mortgage interest payments but not mortgage principal payments
  • Rent and lease payments
  • Utilities
  • Interest on any other debt obligations that were incurred before the covered period

What are the requirements for the borrower?
You’ll need to make a good faith certification confirming that economic conditions make it necessary for you to obtain a loan to continue operating your business and that you’ll use the money to retain workers and maintain mortgage, lease and utility payments.

No personal or business collateral is required and there is no requirement that your business was unable to obtain credit elsewhere.

On the lender side, lenders are required to provide complete payment deferment relief of covered loans for a period of six months.

What are the limitations on loan forgiveness?
Since the purpose of PPP is to protect paychecks, you must commit to maintaining an average monthly number of full-time equivalent employees (FTEs) at least equal to the average monthly number of FTEs during the previous 1-year period. 

PPP loans will be eligible for forgiveness in an amount equal to payments on mortgage interest, rent and utilities put in place before February 15, 2020.  Forgiveness does not extend to the mortgage principal and there are limits on forgiveness based on employee and wage retention.  Reductions will be proportionate to any reduction in the number of employees retained and if any wages were reduced by more than 25%.

The amount of loan forgiveness will be reduced by dividing average FTEs per month by either average FTEs per month employed between February 15, 2019 and June 30, 2019 or average number of FTEs employed between January 1, 2020 and February 29, 2020.

For seasonal employers, the amount of loan forgiveness will be reduced by any reduction in total salary or wages to any employee by more than 25% during the most recent full quarter that the employee was employed.  This includes any employee who did not earn during a single pay period in 2019 an annualized rate over $100,000.

How do I apply?
Applications can be made through any SBA-approved lender at no charge.  Sole proprietorships can start applying April 3, 2020 and independent contractors and self-employed individuals on April 10, 2020. You are encouraged to apply early since there is a funding cap for this program, but applications will be taken through June 30, 2020.

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